A Buy-Side Guide to Regulatory and Transactional Issues Related To Derivatives and Repurchase Agreements

Last Month in Repo – July 2016

July 2016 was a busy month for repo-related news, particularly related to repo clearing. The following is a summary of some of the more significant repo related items that occurred over the past couple of weeks. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

FICC Suspends Interbank GCF Repo Service: Effective for transactions after July 15, 2016, the Fixed Income Clearing Corporation (FICC) suspended the operation of its interbank GCF Repo service, which previously allowed dealers clearing at different GCF Repo clearing banks (i.e., The Bank of New York Mellon and JP Morgan Chase) to match and clear against each other. To facilitate the interbank service, the clearing banks extended uncapped and uncommitted credit to FICC at no charge. The Tri-Party Repo Reform efforts sponsored by the Federal Reserve Bank of New York recommended the elimination of this uncapped and uncommitted line of credit. However, the clearing banks and FICC could not reach a resolution on certain other changes, and operating the interbank service with a capped line of credit was determined to be unfeasible. The interbank service was previously suspended between 2003 and 2008. The intrabank GCF Repo service continues to operate without change. See FICC’s rule change to suspend the interbank service, as filed with the Securities and Exchange Commission (SEC) on May 16, 2016 here.

JP Morgan Exits GCF Repo Clearing: The week after FICC suspended its interbank GCF Repo service, it was reported that JP Morgan Chase would discontinue certain government securities clearing/settlement operations, including GCF Repo clearing at FICC, by the end of 2017. That will leave The Bank of New York Mellon as the only GCF Repo clearing bank at FICC.

Buy-Side Repo Clearing Important in Light of Interbank Suspension: In an interview with Risk Magazine (subscription required), Murray Pozmanter, Managing Director and Head of Clearing Agency Services at the Depository Trust & Clearing Corporation (DTCC), stated that “there is even more of a desire” to launch a buy-side repo clearing program now that FICC, a subsidiary of DTCC, had suspended the interbank GCF Repo service. Mr. Pozmanter indicated that the latest proposal concerning money market mutual funds’ inclusion has been under review with the SEC’s Division of Investment Management for several months. Mr. Pozmanter also indicated that DTCC was moving forward with the “second phase of the plan” to bring in other cash investors not under the SEC or Division’s oversight (e.g., pension funds).

LCH.Clearnet Abandons U.S. Repo Clearing Facility: LCH has operated its RepoClear service in Europe for nearly 20 years, but recent efforts to extend the RepoClear service to the United States have come to a halt. Risk Magazine reported on this development last week (see here, subscription required), indicating that structural challenges and long timeframes led to the abandonment of the program.